How Argentina Can Get Around the U.S. Supreme Court

Argentina could be poised to miss at least $500 million in interest payments on June 30, unless it negotiates a settlement with a small group of holdout creditors, who are owed about $1.5 billion. Many analysts and investors think Argentina may try to get around the order by declaring its bonds fall under Argentine law, beyond the reach of the U.S. judicial system.

Sounds simple enough. Here’s the problem: Nobody knows how this would work in practice.

How did Argentina get to this point?

Argentina and other developing countries have been issuing bonds under New York law for decades as a way to get the funding they need from global investors. Analysts estimate Argentina currently has about $28 billion in New York law bonds, all of which would be converted to local law if Argentina decided to change their jurisdiction. This includes some restructured bonds from Argentina’s most recent default in 2001.

How would this work?

Moving the restructured bonds out of New York law and into Argentina’s legal system involves more than paperwork. A majority of bondholders need to agree to the jurisdiction switch to trigger a collective action clause that forces all other bondholders to get on board.

What are the risks?

U.S. courts could view any bondholder who agrees to Argentina’s offer as helping the country evade the New York court judgment. That would open these investors to legal repercussions, analysts say. Those risks may also prevent U.S.-based banks from transferring Argentina’s payments to bondholders, who would instead be forced to use Argentine banks, which offer fewer protections for investors.

How would bond prices be affected?

Bond prices might drop even if the plan goes through because a switch to local law may force some large institutional investors to sell their Argentine bonds. Global bond indexes only include Argentina’s New York law bonds in their mix. A pension fund that strictly tracks one of those indexes might need to dump Argentine bonds if they’re no longer part of the benchmark.

What are the chances of success?

Time is running out for Argentina. The government only has about six weeks to come up with a solution: two weeks until the missed interest payment on June 30, plus a 30-day grace period. Even if Argentina successfully changes the jurisdiction of the bonds, analysts say that could still count as a technical default because they’re changing the terms of the bond.